Kenmare Resources : Q4 2015 Trading Update

Kenmare Resources plc ("Kenmare" or "the Company")

1 February 2016
               
Q4 2015 Trading Update

Kenmare Resources plc (LSE:KMR, ISE:KMR), one of the leading global producers of titanium minerals and zircon, which operates the Moma Titanium Minerals Mine (the "Mine" or "Moma") in northern Mozambique, is pleased to provide a trading update for the fourth quarter and year ending 31 December 2015, together with update commentary on the ongoing discussions with its lenders.

Overview

• Ore mined in 2015 decreased 19% to 27,532,000 tonnes (2014: 34,120,000 tonnes), mainly due to power interruptions and flooding damage in Q1 2015
• Heavy Mineral Concentrate ("HMC") production decreased 15% to 1,100,600 tonnes (2014: 1,287,300 tonnes)
• Ilmenite production decreased 11% to 763,500 tonnes (2014: 854,600 tonnes)
• Zircon production increased 2% to 51,800 tonnes (2014: 50,800 tonnes)
• Increased primary zircon product quality and improved recovery of secondary zircon volumes
• Total shipments of finished products were flat at 800,400 tonnes (2014: 800,000 tonnes)
• Significant cost per tonne savings have been achieved, notwithstanding increased production from H1 2015 to H2 2015
• Improved power quality and consistency since the December 2015 installation of additional power transmission infrastructure by Electricidade de Moçambique ("EdM")
• A deleveraging plan has been submitted to lenders for approval, including a US$100m investment by State General Reserve Fund ("SGRF") and a further capital raising as part of a balance sheet restructuring

Statement from Michael Carvill, Managing Director: 
"Power interruptions and instability have been the key bottleneck to production at the Moma Mine in recent years and acutely felt in Q1 2015, when flooding resulting in a prolonged outage. However, the investment by EdM to enhance the transmission infrastructure has resulted in a step change in the quality and consistency of our power supply since coming on line in late December.

Prices of ilmenite, our major product, have remained under pressure in Q4 2015. However, the recent closures of titanomagnetite mines in Russia and China and the reduction of feedstock inventories at Chinese ports are encouraging."

Production

Production from the Moma Mine in Q4 2015 and FY-2015 was as follows:

	Q4-2015	Q3-2015	Variance	FY-2015	FY-2014	Variance
	tonnes	tonnes	%	tonnes	tonnes	%
Excavated Ore *	7,052,800	9,057,500	-22%	27,532,000	34,120,000	-19%
Grade*	4.93%	4.54%	9%	4.82%	4.55%	6%
Production
HMC	306,600	339,600	-10%	1,100,600	1,287,300	-15%
Ilmenite	190,700	244,800	-22%	763,500	854,600	-11%
Zircon	14,500	13,300	9%	51,800	50,800	2%
of which primary	10,000	9,400	6%	39,400	43,600	-10%
of which secondary	4,500	3,900	15%	12,400	7,200	72%
Rutile	1,700	1,500	13%	6,000	6,100	-2%
Shipments	198,300	190,000	4%	800,400	800,000	0%

* Excavated Ore and grade prior to any floor losses.

During 2015, Kenmare mined 27,532,000 tonnes of ore at an average grade of 4.82% and produced 1,100,600 tonnes of HMC.  Finished product volumes for the year included 763,500 tonnes of ilmenite and 51,800 tonnes of zircon (including 12,400 tonnes of a lower grade secondary zircon product). During the fourth quarter of 2015, Kenmare mined 7,052,800 tonnes of ore at a grade of 4.93% and produced 306,600 tonnes of HMC, compared with 339,600 tonnes of HMC in the third the quarter of 2015.

HMC production in Q4 2015 was negatively impacted by poor power reliability and stoppages associated with the installation of new power infrastructure by EdM. Separately, mined ore volumes were reduced in the quarter as mining conditions lowered dredge throughputs in comparison to the prior quarter. It is expected that these mining conditions will continue in Q1 2016 before improving. Dry mining has previously been employed to supplement the dredges when required, but was suspended in Q2 2015 as a cost saving measure. Dry mining can be restarted rapidly and the business case for the doing so is frequently reviewed by management in light of mining conditions, marketing considerations and the declining oil price (reducing the operating costs of dry mining).

As a result of the upgrades to the power lines by EdM, dredge operating time is expected to benefit from increased power stability and consistency in 2016. In addition, improving the efficiency and reliability in the operation of the dredges is a key focus area for 2016. Implementation of improved maintenance tactics, improving operator routines and additional engineering skills are expected to factor in this improvement.

Lower HMC production limited production of final products in the fourth quarter. Ilmenite production for the year was 763,500 tonnes (2014: 854,600 tonnes). Stockpiled magnetic feed was not processed into final ilmenite products during the quarter, due to the existing product inventory and cost management strategy.

Total zircon production for the year increased 2% to 51,800 tonnes (2014: 50,800 tonnes). While primary zircon production decreased by 10% to 39,400 tonnes (2014: 43,600 tonnes), the quality was improved significantly. The revenue effect of the lower production of primary zircon was more than offset by the higher quality.

Separately, secondary zircon increased by 72% to 12,400 tonnes (2014: 7,200 tonnes), mainly as a result of processing waste streams into a final product. This increase in recoveries is expected to result in a higher additional volume of secondary zircon production in 2016.

Rutile production for the year was 6,000 tonnes (2014: 6,100 tonnes), a decrease of 2%. Rutile product quality has increased and it is expected that this will result in a higher average price received on a like for like basis in 2016.

During 2015, Kenmare shipped 800,400 tonnes of finished products (2014: 800,000 tonnes), comprised of 742,100 tonnes of ilmenite, 52,400 tonnes of zircon (including 12,100 tonnes of secondary grade zircon) and 5,900 tonnes of rutile.  Sales of total finished products were up 4% to 198,300 tonnes in Q4 2015 (Q3 2015: 190,000 tonnes). Sales comprised 175,900 tonnes of ilmenite, 20,500 tonnes of zircon (14,600 primary and 5,900 secondary), and 1,900 of tonnes rutile. 

Closing stock of HMC at the end of 2015 was 11,800 tonnes, compared with 29,600 tonnes at the start of the year.  Closing stock of intermediate magnetic concentrate at the end of 2015 was 70,500 tonnes. Closing stock of finished products at the end of 2015 was 237,300 tonnes (2014: 219,500 tonnes), of which 60,000 tonnes are being held for a customer under a bill and hold arrangement.

Cost savings

In H2 2015, management successfully constrained total cash operating costs, which remained broadly in line with H1 2015 notwithstanding a 34% increase in final product production, resulting in a significant reduction in the cost per tonne. This sustained unit cost improvement is the result of a continuing drive throughout the organisation to rationalise costs and improve efficiency. A retrenchment plan was implemented in 2015 which, together with other labour cost savings, resulted in a 24% decrease in labour costs and a 14% decrease in headcount compared with 2014. Engineering costs also reduced by 24% principally as a consequence of a sustained focus on improving efficiencies in plant maintenance.

In addition to the significant progress on capital and operating cost control achieved to date by the Moma management team, an external consultant was engaged during H2 2015 to support and extend this ongoing cost control and efficiency programme and it is expected that the recommendations of the consultant will be implemented during the course of 2016. 

Further details of cost savings will be provided on announcement of the full 2015 results.

Power

During December 2015, EdM commissioned new equipment that provides additional transmission capacity on the power network that serves the Moma Mine, increasing transmission capacity from 118MW to 163MW. There has been a marked improvement in power quality and consistency since December and further equipment is expected to be installed through 2016, providing another 15MW of capacity. The additions to date have already fixed the network overloading issues which were previously the cause of voltage collapse during peak demand periods.

Prior to the commissioning of the additional transmission capacity, power supply quality continued to be poor during Q4 2015, with numerous outages and voltage dips mainly due to overloading of the network and to temporary outages related to permanent repairs to power lines damaged in the Q1 2015 floods. 

During December EdM completed the repair of the transmission line at Mocuba which had been damaged during the floods in January 2015.  The repair of the 110kV Moma line, which was also damaged during the floods at the Meluli River crossing, is under way and due to be complete in early February.  The temporary line which has been in place since January has been strengthened to ensure its integrity until the full repair is complete.

Market

There was a deterioration in ilmenite prices in Q4 2015 as competition amongst producers intensified towards the end of the year. Offtake conditions are expected to remain soft in the coming weeks until after Chinese New Year in February. Stronger conditions should follow as the peak pigment production season begins. Expectations are for stronger global pigment demand conditions to emerge in 2016, which should support increased feedstock consumption.

Chinese and Russian titanomagnetite mine closures in 2015, coupled with reduced supply from Vietnam and Australia, have reduced global sulphate ilmenite production. Chloride ilmenite production is also expected to be lower in 2016 due to mine depletions in the USA.

There was also some further moderate softening of zircon prices in the final quarter of 2015 due to weaker offtake conditions in China and positioning by producers to make year-end sales.

In Q1 2016, Kenmare received a force majeure notice from an ilmenite customer to whom approximately 100kt has been allocated for 2016. Although Kenmare has reserved its rights in relation to the force majeure notice, there is a possibility that the underlying event (which the customer is actively seeking to remedy) will lead to a reduction or deferral of shipments and payments for scheduled off-take to this customer.

Debt

Kenmare has delivered a deleveraging plan to lenders as required under the April 2015 amendment. While lenders are still considering this plan it has not been agreed by the deadline of the 31 January, resulting in an event of default. As announced on 7 December 2015, the plan includes an investment of US$100 million by SGRF of the Sultanate of Oman and further investment by shareholders and other investors.

The company continues to monitor and manage its liquidity position very carefully. In support, lenders agreed to defer payment of US$2.3 million fees relating to the April 2015 Amendment from 31 December 2015 to 29 February. In addition, Kenmare and lenders continue to discuss potential accommodations in relation to events of default (including relating to the deleveraging plan) and conditions to further disbursement of super senior debt and no event of default has been declared by lenders to date.

Although there can be no certainty that these matters will be agreed or that the deleveraging plan can be implemented, the Board of Kenmare looks forward to progressing this plan and the related capital raising, subject to the support and co-operation of lenders and key shareholders, and with the indicated support of SGRF.

At 31 December 2015, bank loans amounted to US$341.9 million (2014: US$337.3 million) and cash and cash equivalents were US$14.3 million (2014: US$21.8 million).

Kenmare Resources plc
Michael Carvill, Managing Director                                    
Tel: [phone]                                                             
Mob: + 353 87 674 0110                                                      

Tony McCluskey, Financial Director
Tel: [phone]                                                             
Mob: + 353 87 674 0346

Jeremy Dibb, Corporate Development and Investor Relations Manager
Tel: [phone]
Mob: + 353 87 943 0367

Murray Consultants                                                              
Joe Heron                                                                                 
Tel: [phone]                                                             
Mob: [phone]                                                       

Buchanan
Bobby Morse
Tel: [phone]

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Source: Kenmare Resources via Globenewswire

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